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New guidance intended to clarify when DOJ will decline to prosecute companies in FCPA cases

New guidance intended to clarify when DOJ will decline to prosecute companies in FCPA

cases

Key takeaways

New Foreign Corrupt Practices Act (FCPA) guidance issued late last year by the US Department of Justice (DOJ) has:

adopted as official DOJ policy most aspects of the FCPA Pilot Program announced in April 2016; established a presumption that DOJ will decline to prosecute a business for FCPA violations when the company voluntarily self-discloses misconduct, fully cooperates with DOJ, and takes timely and appropriate remedial action; and provided that this presumption may be overcome based on DOJ's discretionary consideration of aggravating factors such as: -- involvement by executive management in the misconduct; -- a significant profit to the company as a result of the misconduct; -- pervasiveness of the misconduct within the company; and -- criminal recidivism by the company.

Beyond establishing this presumption and identifying reasons why a company might nonetheless face prosecution, the guidance includes several other noteworthy provisions. Significant questions remain regarding how DOJ will apply the new policy, with practical implications for internal investigations and cross-border cases. These issues are discussed below.

Summary

On November 29, 2017, the DOJ issued a new FCPA Corporate Enforcement Policy. The policy will be included in the US Attorneys' Manual (USAM), which contains internal policies and procedures governing the work of DOJ prosecutors. The FCPA Corporate Enforcement Policy revises and perpetuates the FCPA Pilot Program adopted in 2016; and like the Pilot Program, it ref lects DOJ's ongoing effort to create greater clarity and predictability regarding the benefits that companies can expect to obtain if they self-report evidence of misconduct, cooperate fully with DOJ investigations, and take appropriate remedial action. Although the new Corporate Enforcement Policy is consistent in many respects with the 2016 Pilot Program, and also builds upon a longer record of DOJ enforcement action, it contains several new and noteworthy statements that warrant close attention.

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that DOJ will decline to prosecute a company that (i) voluntarily self-discloses a potential FCPA violation, (ii) provides full cooperation, and (iii) engages in timely and appropriate remediation. In order to qualify for a declination under the policy, the company will also be required to give up any proceeds it obtained as a result of the conduct at issue, whether by disgorgement, forfeiture, or restitution.

This presumption may be overcome, however, based on aggravating circumstances relating either to the company or the seriousness of the offense. The policy states that such circumstances might include, but are not limited to: (i) involvement by executive management in the misconduct; (ii) a significant profit to the company as a result of the misconduct; (iii) pervasiveness of the misconduct within the company; and (iv) criminal recidivism. The policy does not define or explain these broadly-framed and illustrative considerations, any one of which could--depending upon interpretation and practical application--provide DOJ with considerable discretion to determine that even under its new policy, a declination should not be granted even though a company has self-reported, fully cooperated, and effectively remediated the misconduct.

The policy further provides that where a company has voluntarily taken such steps, and where DOJ nonetheless decides that a criminal resolution should be imposed, it will accord, or recommend to a sentencing court, a 50% discount off of the low end of the applicable fine range under the US Sentencing Guidelines (except in the case of a criminal recidivist) and will not generally require the appointment of an independent compliance monitor in connection with the resolution.

More limited credit is available for companies that elect not to self-disclose misconduct but later fully cooperate and remediate the misconduct. Such companies will receive, or DOJ will recommend to a sentencing court, up to a 25% discount off of the low end of the penalty range set forth in the Sentencing Guidelines.

Background on the FCPA pilot program and declinations

As we reported previously, DOJ launched a one-year Pilot Program on April 5, 2016 to encourage companies to self-disclose violations of the FCPA, cooperate fully with any ensuing DOJ investigations, and engage in timely and appropriate remediation. On March 10, 2017, the pilot program was extended provisionally while it underwent an evaluation process, as part of a larger policy review that DOJ announced following the change in Administrations.

The Pilot Program Guidance Memo that DOJ issued in 2016 provided little concrete guidance on the subject of declinations. It noted that if a company met all the applicable program criteria (for self-reporting, cooperation, and remediation), DOJ would "consider a declination of prosecution." The Memo then went on to cite countervailing considerations that would weigh against such an outcome. Those considerations closely resembled (but do not precisely match) the aggravating circumstances listed in the recently announced Corporate Enforcement Policy. There was nothing new or noteworthy in this part of the Memo--except, perhaps, for DOJ's reticence regarding declinations, especially as compared to other aspects of the Pilot Program Memo. The Memo did not purport to guide the exercise of DOJ's extremely broad prosecutorial discretion in determining whether to decline or pursue a criminal case; accordingly, it did not provide companies or their counsel with meaningful insight regarding the prospects for a declination in considering whether to take the difficult path that DOJ sought to incentivize by adopting the Pilot Program.

After initiating the Pilot Program, however, DOJ sought to emphasize the prospects for declination through its resolutions and public statements in a series of cases. Specifically, since June 2016, DOJ announced seven declinations under the Pilot Program. Senior DOJ

John K. Warren Senior Associate

T +1 202 777 4580 E john.warren@freshfields.com

Freshfields Bruckhaus Deringer LLP

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officials have pointed to these outcomes in conveying DOJ's enforcement message. For example, at a seminar on transatlantic enforcement that Freshfields hosted in London this past October, the senior leaders of DOJ's Fraud Section (which adopted the Pilot Program and is responsible for criminal enforcement of the FCPA) confirmed that if a company met the criteria that DOJ had set out, there would be a "real possibility" that it would receive a "pass"--meaning that DOJ would decline to prosecute the company. Interestingly, in making this point, DOJ described a situation in which the company, through its cooperation, had obtained and disclosed evidence that DOJ could use to prosecute high-level executives. Another panelist correctly observed that in many cases, such evidence simply would not exist; moreover, it is noteworthy that under both the Pilot Program Memo and the new Corporate Enforcement Policy, the involvement of senior management in unlawful behavior is described as one factor that could preclude declination.

Notwithstanding these concerns as to whether DOJ would exercise its discretion to decline prosecution in a fair and consistent manner, it was clear that even before the new Corporate Enforcement Policy was announced, DOJ was attempting to send a stronger message regarding the prospects for declination during its implementation of the Pilot Program. The Corporate Enforcement Policy confirms and amplifies that message.

Important considerations under the new FCPA corporate enforcement policy

This briefing does not address every provision of the Corporate Enforcement Policy, many of which are already familiar because they remain largely consistent with the Pilot Program, other policies and public statements, and DOJ practice. Several of the more noteworthy features of the policy, along with its practical implications, are discussed below.

The presumption that DOJ will decline prosecution. As noted above, the FCPA Corporate Enforcement Policy creates a presumption that DOJ will decline to pursue criminal charges against a company that meets the program criteria, absent "aggravating circumstances."

The aggravating circumstances identified in the policy are cited as examples; DOJ could identify other factors in any given case. Moreover, each listed factor is framed in broad terms, and each is among the considerations that DOJ has traditionally taken into account, in keeping with longstanding policy and practice, in making decisions regarding whether, and in what manner, to take criminal enforcement action against a company. In many instances, however, DOJ precedent does not provide a reliable basis to predict how it might view potentially aggravating factors in a particular case. To the contrary, experienced prosecutors and defense attorneys have often taken widely differing views regarding, for example, whether misconduct can fairly be characterized as "pervasive," whether relevant employees held "senior" or "executive" management positions, and whether conduct generated "significant profits" for a corporation. Even the meaning of "criminal recidivism," which may seem straightforward, is open to interpretation in the corporate context; for example, would a company that entered into a non-prosecution or deferred prosecution agreement more than a decade ago, or that exercised ownership or control over a former affiliate that entered into a negotiated plea agreement, qualify for the presumption that DOJ has adopted?

To a degree, debates over these questions can be attributed to the advocacy that normally takes place within an adversarial process. To a significant extent, however, diverging opinions on these questions ref lect principled disagreements that one would expect to occur--and that sometimes emerge in purely internal deliberations between prosecutors within DOJ--when f lexible criteria are applied to complex and sometimes murky

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evidentiary records. Accordingly, notwithstanding the presumption in favor of declination that it has now adopted, DOJ has left itself with ample discretion to decide that the presumption either has not been earned or has been overridden in a particular case.

Looking ahead, it will be critical to evaluate carefully how DOJ actually applies this aspect of its policy, and how that practice may evolve over time. Our initial impression is that DOJ is likely to take seriously the presumption that it has announced. Otherwise, if it tries too hard to find reasons to avoid declinations, it will undermine the credibility of its message and the incentives that it has made a concerted effort to put in place. For that reason, in the near term, we expect to see a greater willingness from DOJ to decline prosecution when the program criteria are met--and to broadcast such outcomes publicly to an even greater extent than it did during the Pilot Program, as discussed below. In certain circumstances, however, such as where a declination in a high-profile matter might draw substantial criticism or strike prosecutors as the wrong result, DOJ may take advantage of the large escape hatch that it has built into its policy. And over time--as the enforcement climate changes, and as different generations of DOJ personnel are called upon to apply the policy based on their own judgment and experience--we may see the pendulum swing back towards a more punitive approach. Nothing in US law or the Corporate Enforcement Policy would prevent such a shift, and in some ways, the policy itself demonstrates that DOJ's approach to corporate prosecution remains subject to ongoing change.

Even if the presumption contained in the Corporate Enforcement Policy represents a meaningful and sustained development, it will not by itself dictate clear answers for companies facing difficult decisions. But the policy does merit serious consideration when weighing the competing risks that companies face in deciding whether to selfreport evidence of a potential FCPA violation.

The requirement of a voluntary self-report. In describing how DOJ would evaluate selfdisclosure of misconduct, the Pilot Program Memo stated that DOJ would "make a careful assessment of the circumstances of the disclosure," and specifically provided that "[a] disclosure that a company is required to make, by law, agreement, or contract, does not constitute voluntary self-disclosure for purposes of this pilot." This created concerns for public companies, which are required under US securities law to disclose all information having a material effect on the company in periodic financial statements. The concern was amplified for financial institutions and other companies operating in highly-regulated industries. For example, under banking statutes and anti-money laundering regulations, along with even broader disclosure requirements imposed under supervisory regimes, banks are often required to report potential misconduct to regulators; as a result, the reference to required reporting in the Pilot Program Memo raised the prospect that such firms could never make a report that DOJ would view as voluntary. DOJ has now removed this language, which does not appear in the new Corporate Enforcement Policy. Under the new policy, companies should receive credit for self-reporting so long as the report is made before an imminent threat of disclosure arises, within a reasonably prompt time after becoming aware of the offense, and as to all relevant facts known to the company, including facts about individuals. This approach appears consistent with DOJ's recent FCPA enforcement and declination practices involving regulated financial institutions. DOJ retains the discretion, however, to "make a careful assessment of the circumstances" surrounding a disclosure in determining whether it is voluntary, timely, and complete. Moreover, if a company is required to disclose conduct under the terms of an existing DOJ agreement such as a Deferred Prosecution Agreement (DPA) (rather than pursuant to a statutory, regulatory,

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or supervisory regime), DOJ is more likely to conclude that a declination is not warranted and that voluntary disclosure credit is not appropriate because the agreement already obligated the company to come forward. To the same effect, DOJ might well conclude that a declination is not warranted because of the company's "criminal recidivism."

Proactive cooperation and privilege. The policy requires a company to disclose on a timely basis--"even when not specifically asked to do so"--"all facts relevant to the wrongdoing at issue," including, for example: (i) all relevant facts gathered during a company's independent investigation; (ii) opportunities for DOJ to obtain additional evidence, where the company "is or should be aware" that such opportunities exist; (iii) attribution of facts to specific sources where such attribution does not violate the attorney-client privilege; and (iv) timely updates and rolling disclosures of information.

In continuing to emphasize the importance of individual accountability, DOJ's policy also makes clear that the reporting and cooperation it has in mind would include the disclosure of "all relevant facts about all individuals involved in the violation of law." During their remarks at Freshfields, senior leaders of the Fraud Section confirmed that this has always been their approach, even before the Yates Memo (which was also incorporated in the USAM) highlighted the requirement as a matter of DOJ policy.

As with its existing policy and practice, DOJ's reference to "attribution" in this context glosses over the unresolved tension between clear legal principles governing the existence and preservation of the attorney-client privilege in the context of corporate investigations, on the one hand, and DOJ's expectations regarding full cooperation, on the other. The statement also does not mention the work-product doctrine, notwithstanding the respect accorded to such material under applicable provisions of the USAM (cited later in the Corporate Enforcement Policy). These omissions are notable, particularly because both protections are clearly threatened when counsel for a company is asked to attribute facts "to specific sources"--meaning, most frequently, to individuals who have provided information to a company's counsel during interviews that are privileged, and that ref lect and generate attorney work product, under well-established principles of US law. Indeed, in many cases, DOJ expects that companies will provide it with detailed, witness-by-witness summaries of employee interviews that are conducted by counsel during the course of an internal investigation. Some federal courts have found that providing such summaries to US authorities can, in certain circumstances, waive the protections that would otherwise exist. DOJ has sidestepped and finessed these difficult issues since the Principles of Federal Prosecution of Business Organizations were (yet again) revised and incorporated into the USAM in 2008. In this regard, the Corporate Enforcement Policy is nothing new. But the unresolved issues surrounding privilege, work product, and internal investigations now take on even greater importance; whereas previously, such considerations were one part of the multi-factor analysis that DOJ conducted in exercising its broad discretion, they are now conditions that determine the applicability of the presumption discussed above and the system of discounts set out in DOJ's Corporate Enforcement Policy.

Potential impact on cross-border cases. In seeking to cooperate in accordance with the policy, companies may potentially face challenges when confronted with competing legal obligations of different legal jurisdictions to which they are subject. Such challenges may be further compounded by trends of escalating enforcement, rising fines, and increased legislative activity regarding anti-corruption initiatives and corporate criminal liability in countries all over the world. For example:

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regarding when DOJ will request "de-conf liction," or deferring or postponing investigative steps such as conducting interviews of company employees (e.g., to prevent the impeding of a specified aspect of DOJ's investigation). Although DOJ's policy indicates that such requests will be narrowly tailored and made for a limited period of time, this has the potential to create serious conf licts in cases involving multiple regulators or criminal authorities who may require the company to take such investigative steps in accordance with a timetable set out by those authorities. Conversely--particularly in some jurisdictions, such as the UK--companies are more likely to encounter the opposite risk: US authorities will expect more proactive and thorough internal investigations, consistent with US law and practice, while non-US authorities discourage or prohibit the company and its counsel from taking such action. Moreover, unlike DOJ, such authorities may seek to compel the production of (or even seize) the work product that attorneys produce in conducting internal investigations as part of a mandate to provide a company with legal advice.

-- Overseas data. In addition to timely preservation, collection, and disclosure of relevant documents and information, the FCPA Corporate Enforcement Policy notes that full cooperation requires companies to provide timely disclosure of overseas data, and to facilitate third-party production of documents. In circumstances where a company claims that it is prohibited from producing documents due to foreign data privacy, blocking statutes, or other non-US laws, the company "bears the burden of establishing the prohibition" and "should work diligently to identify all potential ways to provide such documents" to the DOJ.

-- Witnesses. The policy requires that, when requested, companies must make available for interviews by DOJ those company officers and employees who possess relevant information. The policy specifically notes that "this includes, where appropriate and possible, any officers, employees, and agents located overseas as well as former officers and employees ... and, where possible, the facilitation of third-party production of witnesses."

-- Information sharing and threats of corporate prosecution in other jurisdictions. A company that self-reports to DOJ and that provides full cooperation in a DOJ investigation may also face the risk of criminal or regulatory liability in other jurisdictions. This is particularly true in today's environment, where authorities in multiple countries often share information with one another, and where changes in legislation and enforcement practice have created heightened risks for companies engaged in crossborder business activity. A discounted penalty in the US, or even a declination, might well be far less attractive to a company if the reporting and cooperation that DOJ wants to receive results in a series of punishments in other jurisdictions (along with exposure in civil litigation).

It remains to be seen whether DOJ and other agencies can make progress in reducing the incidence and scale of cumulative penalties imposed for the same underlying conduct. With the notable exception of coordination that has occurred between DOJ and the US Securities and Exchange Commission (SEC), such progress has been elusive even within the US, where federal and state authorities--and even, in some instances, criminal and civil components of DOJ itself--have been known to "pile on" by repeatedly punishing the same company for the same behavior. While these offices can always claim to be serving different, complementary, and equally vital public interests, such claims will understandably ring hollow to any company considering the cost-benefit analysis that DOJ wants to inf luence by adopting the Corporate Enforcement Policy.

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Remediation. Companies have to act in a timely manner to achieve full credit for remediation. As part of that requirement, companies will be expected to demonstrate they have undertaken a "thorough root cause analysis" to understand the cause(s) of the underlying misconduct. In addition, companies should be mindful of new DOJ guidance issued in February 2017 describing general features of an effective compliance program in devising their remediation plans. Notably, the plan should take into account the requirement under the new policy that, to obtain credit for remediation, a company must ensure the appropriate retention of business records, including by prohibiting employees from using software (such as messaging or email software) that does not properly store records or communications. This has become a more common and significant problem in recent years, particularly in cross-border investigations, given the proliferation of messaging applications that are compatible with personal smartphones.

Disgorgement. To take advantage of the new policy, companies are required to pay all relevant disgorgement, forfeitures, and/or restitution related to the underlying misconduct, although such requirement may be satisfied by a parallel resolution with another relevant regulator (e.g., the SEC).

Public release. Declinations awarded under the FCPA Corporate Enforcement Policy will be made public. The policy specifies that if a case would have been declined even in the absence of a voluntary self-report, cooperation, and remediation, "it is not a declination pursuant to this Policy" and therefore not subject to public disclosure under the policy. In reality, it may be difficult if not impossible for DOJ to know whether it would have declined regardless of the policy. For this reason, and consistent with the policy's goal of encouraging companies to cooperate by providing greater transparency around declinations, we would expect a public announcement so long as the policy's criteria are met. For public companies that are required to disclose material DOJ investigations in their securities filings, this aspect of the Corporate Enforcement Policy is unlikely to affect their decision to make a voluntary disclosure. However, other companies that are potentially subject to the FCPA--such as non-public US companies or foreign companies acting in the United States-- may have no such obligations to report investigations publicly. For these companies, the prospect of a public disclosure that they reported a potential violation the FCPA--even in the context of a declination--may be an important consideration in determining whether to self-report misconduct to DOJ.

Application beyond the FCPA. During its implementation of the Pilot Program--which, by its terms, applied only to FCPA cases--the Fraud Section of DOJ nonetheless cited the principles set forth in the program in its resolution of other kinds of cases as well. This made perfect sense, particularly in matters that involved many of the same considerations as those typically arising in the FCPA context. There was no principled basis for DOJ to treat similar cases in different ways. The Corporate Enforcement Policy has now been explicitly endorsed at the highest levels of DOJ and will be incorporated into the USAM, which applies to all DOJ prosecutors and not just to one section within the Criminal Division. It will be important to see whether the Fraud Section, other parts of the Criminal Division, and various other prosecuting offices within DOJ--whether at "Main Justice" in Washington, D.C. or around the US--apply the same principles in resolving or declining to prosecute other cases against corporations. The policy, by its explicit terms, applies only to the FCPA. But again, the same was true of the Pilot Program, and the DOJ office with primary responsibility for enforcing the FCPA has already made clear that it was appropriate to apply the same principles more broadly in resolving other kinds of complex, cross-border criminal cases.

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This material is provided by the US law firm Freshfields Bruckhaus Deringer US LLP and the international law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership organized under the law of England and Wales) (the UK LLP) and by the offices and associated entities of the UK LLP practicing under the Freshfields Bruckhaus Deringer name in a number of jurisdictions, together referred to in the material as "Freshfields." For

regulatory information please refer to www.freshfields.com/en-gb/footer/legal-notice/. Freshfields Bruckhaus Deringer US LLP has offices in New York City and Washington, DC. The UK LLP has offices or associated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Russia, Singapore, Spain, the United Arab Emirates

and Vietnam. This material is for general information only and is not intended to provide legal advice. Prior results do not guarantee a similar outcome.

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